In re NBW Commercial Paper Litigation

Full title: In Re NBW COMMERCIAL PAPER LITIGATION. AMERICAN FEDERATION OF STATE…

Court: United States District Court, D. Columbia

Date published: Dec 11, 1992

813 F. Supp. 7 (D.D.C. 1992)

Opinion

Master File No. 90-1755 (RCL), Civ. A. No. 91-0626 (RCL).

December 11, 1992.

William F. Sheehan, Christopher E. Palmer, Shea Gardner, Washington, DC, for plaintiff.

Abraham D. Sofaer, William R. Stein, Robert P. Reznick, Lawrence F. Bates, Hugues, Hubbard Reed, Burton H. Finkelstein, Finkelstein, Thompson Loughran, Washington, DC, for defendant.

MEMORANDUM OPINION

LAMBERTH, District Judge.

This case comes before the court on AFSCME's Renewed Motion for Summary Judgment on Count I of its Complaint ("AFSCME Motion"); Memorandum of FDIC in Opposition to AFSCME's Renewed Motion for Summary Judgment and in Support of FDIC's Cross-motion for Summary Judgment on Count I ("FDIC Motion"); Reply Memorandum in Support of AFSCME's Renewed Motion for Summary Judgment on Count I of its Complaint and in Opposition to the FDIC's Motion for Summary Judgment ("AFSCME Reply"); Reply Memorandum of FDIC in Support of its Cross-motion for Summary Judgment on Count I; Brief of the Securities and Exchange Commission, Amicus Curiae ("SEC Brief"); Response of FDIC to Brief of the Securities and Exchange Commission, Amicus Curiae ("FDIC SEC Response"); Response of the Individual Defendants to AFSCME's Motion for Summary Judgment against the Federal Deposit Insurance Corporation; AFSCME's Reply to the Individual Defendants' Opposition to AFSCME's Motion for Summary Judgment against the FDIC; and the Statements of Material Facts in Dispute and the Statements of Material Facts not in Dispute submitted by both sides.

Upon consideration of the representations made by counsel in their briefs, and for the reasons stated below, the court finds that AFSCME has satisfied the criteria necessary for summary judgment on Count I of its complaint.

I. INTRODUCTION AND HISTORY.

Starting in 1984 and continuing through 1990, Washington Bancorporation a District of Columbia bank holding company, issued commercial paper, largely to raise capital for its subsidiary, Washington Mortgage Group. This commercial paper, with maturities of as little as one day and amounting to as much as approximately $55 million, was sold only through another WBC subsidiary, the National Bank of Washington ("NBW"). (NBW comprised approximately 91 percent of WBC's assets at the end of 1989, and many of the directors and officers served both entities.)

In early 1990, WBC faced dire economic straits. By May 4, 1990 (by which time, WBC had reduced its outstanding commercial paper obligations to around $37 million), WBC had no lines of credit with which to back its commercial paper obligations and precious few liquid assets.

On May 4, 1990, AFSCME purchased $1.8 million in WBC commercial paper from the Treasury Services Department of NBW. This commercial paper was set to mature on May 7, 1990 (the next business day). On May 7, however, WBC ceased issuing commercial paper and declared a default on all paper then outstanding. Three months later, WBC filed for protection under Chapter 11 of the Bankruptcy Code, and the FDIC was appointed conservator of NBW; shortly thereafter, the OCC appointed FDIC as receiver.

This case is one of more than forty brought by purchasers of WBC commercial paper against NBW and the FDIC as receiver for NBW; these cases have been consolidated as In re NBW Commercial Paper Litigation, Master File No. 90-1755 (RCL) (D.D.C.). The parties have designated that AFSCME v. FDIC shall be a "test" case in the litigation.

Thus far, the court has denied the FDIC's motion to dismiss as to Count I of AFSCME's complaint (Mem. Op., Mar. 10, 1992). (On the same date, the court also denied the FDIC's motion to dismiss as to two other counts and granted the FDIC's motion as to the remaining seven counts.) The remaining claim, Count I, is a claim under §§ 5 and 12(1) of the Securities Act of 1933, 15 U.S.C. § 77e and 771(1), by which AFSCME asserts that NBW, as an alleged seller of an unregistered security, is liable to AFSCME for the value of the security.

The case now comes before the court on the parties' cross motions for summary judgment as to Count I.

II. DISCUSSION.

In order to prove a claim under § 12(1) of the Securities Act of 1933, 15 U.S.C. § 771(1) ¹, the plaintiff must demonstrate that the defendant offered or sold a security in violation of § 5 of the Act ( 15 U.S.C. § 77e). Thus, AFSCME's prima facie case includes three² elements:

1 15 U.S.C. § 771 reads, in pertinent part:
Any person who —

(1) offers or sells a security in violation of section 77e of this title . . .

shall be liable to the person purchasing such security from him . . .

2 The independent defendants assert that a fourth element, loss causation, must also be proven. As discussed in Part II.D., below, however, § 12(1) does not require the plaintiff to prove loss causation.

1. that the WBC commercial paper falls within the statutory definition of "security;"

2. that NBW was a "seller" of the WBC commercial paper for purposes of the act; and

3. that the commercial paper was not registered as required by § 5.³

3 The FDIC has attempted to demonstrate that the commercial paper was not registered because it qualified for an exemption under either § 3(a)(3) or § 4(2) ( 15 U.S.C. § 77c(a)(3) 77d(2), respectively). This argument is considered in Part II.C., below.

In order to grant summary judgment on Count I, as AFSCME asks, the court must find that there is "no genuine issue as to any material fact." Fed.R.Civ.P. 56. See Lujan v. National Wildlife Federation, 497 U.S. 871, 884, 110 S.Ct. 3177, 3186, 111 L.Ed.2d 695 (1990).

Each of the elements will be addressed in turn.

A. The WBC Commercial Paper Was a "Security."

In order to recover from the defendant, AFSCME must first demonstrate that the WBC commercial paper⁴ NBW sold to AFSCME was a "security" for purposes of the Securities Act of 1933. Although the definition of security would appear to be reasonably clear from the act itself, the Supreme Court has never specifically held that commercial paper qualifies as a security under § 12(1) of the Act.

4 "'Commercial paper' refers generally to unsecured, short-term promissory notes issued by commercial entities." Securities Industry Ass'n v. Board of Governors, 468 U.S. 137, 140 n. 1, 104 S.Ct. 2979, 2981 n. 1, 82 L.Ed.2d 107.

The parties cite two cases to the court on the issue, Securities Industry Ass'n v. Board of Governors, 468 U.S. 137, 104 S.Ct. 2979, 82 L.Ed.2d 107 (1984) (referred to as " Bankers Trust I"), and Reves v. Ernst Young, 494 U.S. 56, 110 S.Ct. 945, 108 L.Ed.2d 47 (1990). The court holds that the former case, Bankers Trust I, provides the proper context for determining the scope of the term "security" in the present case; under that analysis, the WBC commercial paper is properly termed a security. However, even if the Reves standards describes the appropriate test, the court holds that the WBC commercial paper is nonetheless properly termed a security under the 1933 Act.

1. Bankers Trust I.

In Bankers Trust I, the Court faced the issue of whether § 16 of the Banking Act of 1933 (commonly known as the Glass-Steagall Act) prohibited commercial banks from underwriting commercial paper. After examining the language and the purposes of the Act, the Court determined that commercial paper was indeed a security. As the Court stated, there is "considerable evidence to indicate that the ordinary meaning of the term 'security' and 'note' as used by the 1933 Congress encompasses commercial paper." Bankers Trust I, 468 U.S. at 150, 104 S.Ct. at 2986. For instance, in the definition section of the Act, § 2(1) (77 U.S.C. § 77b(1)), the term "security" is given an open-ended, extremely broad definition: "any note, stock, treasury stock, bond, debenture, etc." Id. In addition, the Court noted that "[i]n each of [the securities and banking] statutes, the definition of the term 'security' includes commercial paper, and each statute contains explicit exceptions where Congress meant for the provision of an Act not to apply to commercial paper." 468 U.S. at 150-51, 104 S.Ct. at 2987. Among the statutes included in the Court's discussion was the Securities Act of 1933 (at issue here today); specifically highlighted was § 12 of that act ( 15 U.S.C. § 77 l). Finally, the Court examined the purposes of the Banking Act and determined that Congress' intention of protecting the banks from imprudent underwriting required that commercial paper be included within the definition of security.

Although part of the Court's discussion is dicta, it nevertheless demonstrates that, to the 1933 Congress, the common understanding of the term "security" included commercial paper.⁵ Moreover, this interpretation fulfills the goals of the Securities Act. With this in mind, the court today holds that the WBC commercial paper is a security for purposes of § 12(1).

5 The D.C. Circuit later reached the same conclusion. Securities Industry Ass'n v. Board of Governors, 807 F.2d 1052, 1063 (D.C. Cir. 1986).

2. Reves.

The defendant claims first that the Court in Bankers Trust I dealt solely with the Glass-Steagall Act and merely held that commercial paper is like any other "note." Moreover, even if the Court adopted a broader definition of the term "security" in Bankers Trust I, the FDIC asserts that the Court narrowed that definition six years later in Reves. The court today concludes that the Supreme Court did not alter its statements in Bankers Trust I concerning the breadth of the definition of "security." Even if the Reves test applies, however, the WBC commercial paper is still a security under the Act.

In Reves, the Court had to determine whether promissory notes issued by a farmers cooperative qualified as securities under § 3(a)(10) of the 1934 Securities Act.⁶ Recognizing that Congress "enacted a definition of 'security' sufficiently broad to encompass virtually any instrument that might be sold as an investment," Reves, 494 U.S. 56, 61, 110 S.Ct. 945, 949, and noting that the Securities Acts define "security" to include "any note," the Court determined that analysis of notes must begin with a rebuttable presumption that every note is a security. 494 U.S. at 65, 110 S.Ct. at 951.

6 Although Reves dealt particularly with the 1934 Securities Act, the Court acknowledged that the definition of a security in 1934 Act is "virtually identical" to the definition in the Securities Act of 1933. 494 U.S. at 61 n. 1, 110 S.Ct. at 949 n. 1.

The Court then delineated a four-part analysis to determine the characteristics of a note which would rebut the general presumption. 494 U.S. at 66, 110 S.Ct. at 952. Those criteria include: first, an examination of the transaction "to assess the motivations that would prompt a reasonable seller and buyer to enter into it[;]" second, an examination of "the 'plan of distribution' of the instrument[;]" third, an examination of "the reasonable expectations of the investing public[;]" and fourth, an examination of "whether some factor such as the existence of another regulatory scheme significantly reduces the risk of the instrument, thereby rendering application of the Securities Acts unnecessary." 494 U.S. at 66-67, 110 S.Ct. at 952.

The application of these standards to the present case sufficiently indicates that the WBC commercial paper qualifies as a "security" for purposes of the 1933 Act.⁷

7 It should be noted that no one of these four criteria is crucial, and the failure of one will not automatically result in a determination that the note in question is not a security. Rather, a balancing of the four must be conducted in order to determine whether, on the whole, the note looks more like a security than not. In the present case, nonetheless, all four factors point in the direction of a finding that the WBC commercial paper is a security.

(1) The first standard looks to the intentions of both parties to the transaction. From the buyer's side, notes are more likely to be considered securities if the buyer is interested in profits or in investment rather than in the financing appurtenant to a sale. As for the seller, securities are more likely found in the raising of money for the general use of a business rather than in advancing "some other commercial or consumer purchase." 494 U.S. at 66, 110 S.Ct. at 952. Here, investors were lured to WBC commercial paper, among other ways, by NBW's catalog of Investment Services. There, commercial paper is listed as an investment which offers "a high return for fixed maturities." AFSCME Appendix⁸, ex. 7 at 6. Another brochure, this one issued by the Treasury Services Department, noted that commercial paper offered " investment opportunities." FDIC Appendix⁹, ex. 11 at 4 (emphasis added). As for the seller's intentions, the NBW Investment Services catalog stated that commercial paper was used "by a large corporation or finance company to raise working capital." AFSCME Appendix, ex. 7 at 6. The brochure than cites Washington Bancorporation of an example of such a company. Although the FDIC attempts to argue that AFSCME used the commercial paper in cash management, FDIC Motion at 31, that assertion does not preclude a finding that AFSCME's investment in commercial paper was just that: an investment. This comports with Reves, 494 U.S. at 68, 110 S.Ct. at 953, in which "one of the primary inducements offered purchasers was an interest rate constantly revised to keep it slightly above the rate paid by local banks," much like the slightly elevated rates promised investors here.

8 "AFSCME Appendix" refers to the AFSCME's Appendix to its Motion for Summary Judgment on Count I of its Complaint.

9 "FDIC Appendix" refers to the two-volume Evidentiary Appendix to Memorandum of FDIC in Opposition to AFSCME's Renewed Motion for Summary Judgment and in Support of FDIC's Cross-motion for Summary Judgment on Count I.

(2) The second criterion examines the plan of distribution "to determine whether it is an instrument in which there is 'common trading for speculation or investment.'" 494 U.S. at 66, 110 S.Ct. at 952 (citation omitted). The FDIC asserts that WBC commercial paper was sold to a limited number of sophisticated purchasers, was sold solely in large denominations, and was only available through NBW's Treasury Services department, not through branch offices. FDIC Motion at 31. Thus, it concludes, the plan of distribution is too limited to term the WBC commercial paper a security. However, the commercial paper was offered to the public in NBW's Investment Services brochures and several individuals — including at least 11 of the 49 holders of WBC commercial paper as of May 7, 1990, FDIC Appendix, Ex. 35, Exhibit YY ( see also SEC Brief at 20) — purchased the commercial paper, often for as little as $25,500. See AFSCME Appendix, Ex. 36, Exhibit A-3.1. Although the majority of the purchases may have been for large amounts and may have been made by sophisticated current customers of NBW, the fact that several individuals also purchased the investment indicates that there was common trading for investment: the commercial paper was "offered and sold to a broad segment of the public, and that is all [the Supreme Court has] held to be necessary to establish the requisite 'common trading' in an instrument." 494 U.S. at 68, 110 S.Ct. at 953.

(3) The third prong of this examination looks to the reasonable expectations of the public. Given the brochures mentioned at part (1), above, it is clear that NBW included commercial paper as just one of the many "investments" available to its customers. The FDIC argues that the limited universe of customers precludes any finding of a general "public," FDIC Motion at 31, but that argument is belied by the plain language of the circulars, which is aimed at the general public. Moreover, the circulars apparently were left behind at potential customers' offices after sales calls. FDIC Appendix, ex. 8, pp. 108-111. In short, although the entire investing public of Washington, D.C., might not have been aware of the opportunity to "invest" in WBC commercial paper at NBW, NBW did present commercial paper to its customers, the relevant public, as an investment. Therefore, the court concludes that NBW customers — potential or actual — could reasonably conclude that the purchase of commercial paper was an investment, see Reves, 494 U.S. at 69, 110 S.Ct. at 953.

(4) The final factor looks to other regulatory schemes to determine whether application of the Securities Acts is rendered unnecessary. See Marine Bank v. Weaver, 455 U.S. 551, 102 S.Ct. 1220, 71 L.Ed.2d 409 (1982). The FDIC points to the regulation of WBC by the Federal Reserve Board, the regulation of NBW by 0CC, and the public disclosure concomitant with NBW's status as a publicly-traded company as indications that further regulation is unnecessary. FDIC Motion at 32-33. None of these, however, provides sufficient protection to the investor the goal of the Securities Acts and of this portion of the analysis. For instance, the Federal Reserve Board — as well as the statutes cited by the FDIC — is designed to ensure the stability of banks and bank holding companies, not to protect the investor. See 12 U.S.C. § 1844(e). Although it can be argued that Board oversight ultimately will benefit the investor, it does so only indirectly. Moreover, the interests of the banking laws (protecting banks) and the interests of investors often diverge, thus salvaging banks at the expense of investors. See Holloway v. Peat, Marwick, Mitchell Co., 879 F.2d 772, 788 (10th Cir. 1989), vacated and remanded on other grounds, 494 U.S. 1014, 110 S.Ct. 1314, 108 L.Ed.2d 490, aff'd, 900 F.2d 1485 (10th Cir. 1990). Similarly, in the interest of benefiting NBW, the 0CC prevented payment of moneys by NBW to WBC which could have been used to pay off the investors' commercial paper debts; thus, instead of rendering the Securities Acts unnecessary, OCC oversight actually left the Securities Acts as the only protection for holders of WBC commercial paper. Finally, the revelations made by WBC as a publicly-traded entity did not sufficiently apprise potential investors of the risks inherent in investing in WBC commercial paper. The only protection these investors could have had on these "uncollateralized and unsecured" notes, see Reves, 494 U.S. at 69, 110 S.Ct. at 953, would have been through regulation under the Securities Act. Pinter v. Dahl, 486 U.S. 622, 638, 108 S.Ct. 2063, 2074, 100 L.Ed.2d 658 (1988).

Thus, all four criteria point to the conclusion that, even if Reves were to provide the appropriate standard, there is no genuine issue of material fact as to whether WBC commercial paper is a security for purposes of the Securities Act of 1933. It is.

B. NBW Was a "Seller."

Section 12(1) imposes strict liability on any person who "offers or sells a security" in violation of the registration requirement of the Securities Act. 15 U.S.C. § 77 l(1). Congress did not, however, clearly "delineat[e] who may be regarded as a statutory seller, and the sparse legislative history sheds no light on the issue." Pinter v. Dahl, 486 U.S. 622, 642, 108 S.Ct. 2063, 2076, 100 L.Ed.2d 658 (1988). Nonetheless, the facts in this case make it abundantly clear that, by whatever standard, NBW was a seller of WBC commercial paper for purposes of § 12(1).

In Pinter, the Court faced the question of whether an investor in unregistered oil securities faced liability under § 12(1) after he solicited other investors into the failed scheme. The Court first examined the language of the statute and determined that ownership or transference of title were not necessary elements for liability to attach. Rather, "a securities vendor's agent who solicited the purchase would commonly be said, and would be thought by the buyer, to be among those 'from' whom the buyer 'purchased,' even though the agent himself did not pass title." Pinter, 486 U.S. at 644, 108 S.Ct. at 2077. Moreover, the Court concluded that "Congress' express definition of 'sells' in the original Securities Act to include solicitation suggests that the class of those from whom the buyer 'purchases' extended to persons who solicit him." 486 U.S. at 645, 108 S.Ct. at 2077. The Court explained its ultimate decision thus: "An interpretation of statutory seller that includes brokers and others who solicit offers to purchase securities furthers the purposes of the Securities Act — to promote full and fair disclosure of information to the public in the sales of securities." 486 U.S. at 646, 108 S.Ct. at 2078.

In this case, NBW clearly served as an agent for WBC. NBW was a wholly-owned subsidiary of WBC, AFSCME Appendix, ex. 4 at 11, and NBW constituted approximately 90 percent of WBC's consolidated assets. Id. Moreover, NBW employees performed all of WBC's activities, as WBC had no employees, AFSCME Appendix, ex. 5 at 1, 5, and many of the officers and directors served both entities. AFSCME Appendix, ex. 4 at 51-53. And, in fact, NBW was the only seller of WBC commercial paper. Thus, NBW clearly was the agent of WBC, the title owner of the commercial paper. Thus, at first glance, NBW qualifies as a statutory seller.

However, there are two arguments which, if successful, would nonetheless absolve NBW of liability.

The first argument, strenuously urged by the FDIC and the individual defendants, is based on the Pinter framework as further interpreted by the Eleventh Circuit Court of Appeals in Ryder Int'l Corp. v. First American Nat'l Bank, 943 F.2d 1521 (11th Cir. 1991). Under this interpretation, only an entity which engages in "active solicitation" may be liable under § 12(1). FDIC Motion at 9.

However, this reading misconstrues the Court's purpose in Pinter. In examining, and ultimately rejecting, the substantial-factor test used by the Fifth Circuit, the Court worried that a too-broad reading of seller "might expose securities professionals, such as accountants and lawyers, whose involvement is only the performance of their professional services, to § 12(1) strict liability for rescission. The buyer does not, in any meaningful sense, 'purchas[e] the security from' such a person." Pinter, 486 U.S. at 651, 108 S.Ct. at 2081. The Court therefore limited solicitation to exclude these non-integral parties. However, it cannot reasonably be argued that NBW fits into this exclusion. Rather, NBW played a significant role in the marketing of WBC commercial paper, including listing it in its sales brochures. In fact, NBW was the only seller of WBC commercial paper to the public, and if NBW is not liable, there can be no liability under § 12(1) (which only allows for recovery from the immediate purchaser, see Pinter, 486 U.S. at 644 n. 21, 108 S.Ct. at 2077 n. 2.1). Such a conclusion is untenable.

The primary case the FDIC relies upon, Ryder, also offers no support for the FDIC's strained reading of Pinter. In that case, the court faced a § 12(2) (not § 12(1)) claim by Ryder against a bank, First American, for the sale of a security which failed. Unlike this case, however, the bank merely took the order of Ryder's employee and fulfilled the sale. Although the court noted that the buyer's agent (the bank) would not be liable due to the fact that it did not actively solicit the purchase, the court also stated that "in contrast to a buyer's agent it would be uncommon for a seller's agent not to engage in solicitation if he or she is hired to sell a principal's securities." Ryder, 943 F.2d at 1531 (emphasis in original).

In contrast, although NBW may have merely taken AFSCME's order for commercial paper on May 4, 1990, the totality of the circumstances indicates that solicitation was present. First, the court must consider the reality of commercial paper, which typically is used as a roll-over investment on a short-term, even daily, basis; this is unlike the longer term notes in Ryder. Second, the court notes that many NBW customers invested in WBC commercial paper, thus further distinguishing this case from Ryder, in which only one of First American's customers (Ryder itself) purchased the failed security. As the Ryder court held that this alone belied the suggestion that the bank was actively selling the security, 943 F.2d at 1533 n. 17, this court, in contrast, concludes that the great number of NBW investors who invested in WBC commercial paper belies the argument that NBW was not soliciting sales of WBC commercial paper. Finally, a finding that NBW solicited AFSCME in this case also furthers the ends of the securities laws. The Ryder court noted that '[t]he securities laws were enacted in large part to curb conflicts of interest created by the combination of banking and securities activities." Ryder, 943 F.2d at 1534. Given the integral connection between NBW and WBC, conflict of interest is rampant in this case. The court therefore concludes that the FDIC's reading of Pinter is erroneous; moreover, the court determines that NBW did solicit AFSCME to purchase WBC commercial paper.

The FDIC derives a second possible way of avoiding liability from the statutory requirement that the sale be made "for value." 15 U.S.C. § 77b(3). See Pinter, 486 U.S. at 647, 108 S.Ct. at 2078. The Ryder court also recognized that "liability extends only to one who solicits a purchase and is 'motivated at least in part by a desire to serve his own financial interests or those of the securities owner.'" Ryder, 943 F.2d at 1526 (quoting Pinter, 486 U.S. at 647, 108 S.Ct. at 2078) (emphasis in original). Given the integral correlation between NBW and WBC, however, there is no question that NBW was motivated by its own financial interest as well as that of WBC when it sold the paper (unlike the Ryder case where the link between the issuer and the bank was more attenuated). Therefore, the second possible exclusion also is unavailing.

The court thus concludes that NBW is a statutory seller of the WBC commercial paper and is therefore liable to those who purchased the paper from it under § 12(1).

C. The WBC Commercial Paper Was not Exempt from Registration.

The WBC commercial paper was not registered. This fact alone usually satisfies the third element of plaintiff's prima facie case. However, the FDIC asserts that, even if the first two criteria are met, NBW did not violate § 5 (and therefore § 12(1)) because the WBC commercial paper was not required to be registered. The FDIC claims that two exemptions apply to the WBC commercial paper: § 3(a)(3) and § 4(2) ( 15 U.S.C. § 77c(a)(3) 77d(2), respectively).¹⁰ The court holds that neither of these statutory exemptions apply to the WBC commercial paper.

10 The burden of demonstrating these exemptions falls on the FDIC.

1. § 3(a)(3).

The FDIC argues that this statutory exemption is facially clear: any note with a maturity of less than nine months is exempted. Thus, concludes the FDIC, the WBC commercial paper, which had a maturity in this case of three days (one business day), fits within the exemption. In addition, the Supreme Court in Bankers Trust I mentions in dicta that commercial paper was specifically exempted from the registration requirements of the statute. Bankers Trust I, 468 U.S. 137, 151 n. 7, 104 S.Ct. 2979, 2986-87 a. 7, 82 L.Ed.2d 107 (1984).

Despite the FDIC's attempt to simplify this issue, however, the court finds that the broad provision included in § 3(a)(3)¹¹ does not exempt the WBC commercial paper from registration. Rather, the legislative history of the Act, the changing field of securities investment, and the later interpretations of courts addressing this issue demand that a less broad interpretation be given to § 3(a)(3). Only with this narrower interpretation of § 3(a)(3) may the primary purpose of the Securities Act — the "protect[ion of] investors by requiring publication of material information thought necessary to allow them to make informed investment decisions concerning public offerings of securities in interstate commerce," Pinter, 486 U.S. at 638, 108 S.Ct. at 2074 — be achieved.

11 15 U.S.C. § 77c(a)(3) reads, in pertinent part:

(a) . . . the provisions of this subchapter shall not apply to any of the following classes of securities:

(3) Any note, draft, bill of exchange, or banker's acceptance which arises out of a current transaction or the proceeds of which have been or are to be used for current transactions, and which has a maturity at the time of issuance of not exceeding nine months, exclusive of days of grace, or any renewal thereof the maturity of which is likewise limited.

a. Statutory interpretation and securities laws.

The Supreme Court, in interpreting provisions of the Securities Act and its relatives, has often acknowledged the significance of legislative history. See, e.g., Bankers Trust, 468 U.S. at 152, 104 S.Ct. at 2987. For instance, in Reves, the Court "interpret[ed]" an analogous provision in 15 U.S.C. § 78c(a)(10) (excluding from coverage of the act "any note . . . which has a maturity at the time of issuance of not exceeding nine months") to not apply to demand notes "[i]n light of Congress' broader purpose in the Acts of ensuring that investments of all descriptions be regulated to prevent fraud and abuse." Reves, 494 U.S. 56, 73, 110 S.Ct. at 955. The Court quite specifically implied that, although it did not need to determine at this time whether "the plain words of the [statute] are dispositive," 494 U.S. at 70, 110 S.Ct. at 954, the plain words would not apply if such language contravened Congress' intent. Moreover, even though the statute clearly exempted "all notes" with maturities of less than nine months, the Court disregarded the theory that "Congress intended to create a bright-line rule exempting from the 1934 Act's coverage¹² all notes of less than nine months' duration." 494 U.S. at 73, 110 S.Ct. at 955.

12 As mentioned earlier, see note 6, the applicability of this exception in the 1933 and 1934 Acts is virtually analogous.

In addition to examining legislative history, the Supreme Court has similarly noted that courts must look to the economic reality of transactions when interpreting the securities laws: "In discharging our legal duty, we are not bound by legal formalisms, but instead take account of the economics of the transaction under investigation." See, e.g., Reves, 494 U.S. at 61, 63, 110 S.Ct. at 949, 950 (1990); Tcherepnin v. Knight, 389 U.S. 332, 336, 88 S.Ct. 548, 553, 19 L.Ed.2d 564 (1967). Thus, in Reves, the Court held that "the phrase 'any note' should not be interpreted to mean literally 'any note,' but must be understood against the backdrop of what Congress was attempting to accomplish in enacting the Securities Acts." 494 U.S. 56, 63, 110 S.Ct. 945, 950. Since regulating some types of "notes" would contravene Congress' intent (as determined by the courts), courts have simply modified the definition of "note" to exclude these unwanted types.

When these two indicia — legislative intent and economic reality — are applied, as in Reves, to a statute in the Securities Act, the result may appear counterintuitive. For instance, the "any note" language at issue in Reves merely created a presumption that a note would be a security. 494 U.S. at 65, 110 S.Ct. at 951. Instead of taking the statutory language at face value, the Court held that a note is not a security if the above presumption were rebutted by the application of a four-part analysis. In other words, the Court indicated that, in some cases, it is necessary to interpret certain provisions of the Securities Acts in order to ensure that Congress' intent will be implemented.

b. Legislative intent of § 3(a)(3) and the economic reality of commercial paper.

In 1961, the Securities and Exchange Commission issued its interpretation of the proper scope of § 3(a)(3):

The legislative history of the Act makes clear that section 3(a)(3) applies only to prime quality negotiable commercial paper of a type not ordinarily purchased by the general public, that is, paper issued to facilitate well recognized types of current operational business requirements and of a type eligible for discounting by Federal Reserve banks.

SEC Release No. 33-4412, 26 Fed.Reg. 9158 (1961). This provision has generally been acknowledged by the courts of appeals, and specifically adopted by the Second and Seventh Circuits. See SEC v. American Bd. of Trade, 751 F.2d 529 (2d Cir. 1984); Hunsinger v. Rockford Business Credits, Inc., 745 F.2d 484 (7th Cir. 1984); Zeller v. Bogue Elec. Mfg. Corp., 476 F.2d 795 (2d Cir.), cert. den'd, 414 U.S. 908, 94 S.Ct. 217, 38 L.Ed.2d 146 (1973); Sanders v. John Nuveen Co., 463 F.2d 1075 (7th Cir.), cert. den'd, 409 U.S. 1009, 93 S.Ct. 443, 34 L.Ed.2d 302 (1972). On the other side of the balance, no court addressing the subject has rejected the SEC's interpretation.¹³ In short, the SEC release states that only prime quality commercial paper which is not generally available to the public qualifies for the § 3(a)(3) exemption.¹⁴

13 The Supreme Court has not addressed the controversy, likely because there is no split among the circuits.

14 The SEC argues in its amicus brief that four criteria are inherent in the release. SEC Brief at 39. However, the "that is," indicates that the second two criteria (dealing with business requirements and discounting) are not independent criteria but rather modifiers of the first two criteria ("prime quality" and "not ordinarily purchased by the general public"). Thus, the court applies only the first two criteria in its analysis.

The SEC's interpretation is consistent both with the legislative history of the 1933 Securities Act and with the economic reality of commercial paper in 1933 and today. As stated above, the purpose of the Securities Act was to provide for the safety of the investing public. Moreover, the legislative history of § 3(a)(3) demonstrates that the purpose of the exclusion is to exempt from the coverage of the Acts only commercial paper-short-term, high quality instruments issued to fund current operations and sold only to highly sophisticated investors. See S.Rep. No. 47, 73d Cong., 1st Sess., 3-4 (1933); H.R. Rep. No. 85, 73d Cong., 1st Sess., 15 (1933). This commercial paper was almost exclusively purchased by banks and commercial paper dealers, not by unsophisticated parties like the ordinary public, and had a record of safety comparable to government bonds. See Federal Securities Act, 1933: Hearings on 5. 875 before the Senate Committee on Banking and Currency, 73d Cong., 1st Sess. 94 (1933).

However, commercial paper has evolved into a riskier transaction in which the general public now partakes. In fact, as many as twenty percent or more of the holders of WBC commercial paper were in fact individuals, not sophisticated banks or commercial paper dealers. In light of the changed economic circumstances and in order to ensure that the investing public receives the safeguards Congress intended, the broad statutory exemption enacted by Congress is not tenable.

c. The present scope of § 3(a)(3).

Thus, the court today holds that the exemption created by § 3(a)(3) creates a presumption that any security with a duration of less than nine months is exempted from the scope of the statute. However, as with the presumption that a note is a security created by the Supreme Court in Reves, this presumption is rebuttable with evidence that sales are made to the public (or other unsophisticated investors) and that the investments are of less-than-prime quality.¹⁵

15 In keeping with the purposes of the statute, the presumption. is successfully rebutted only if both elements are met.

The FDIC claims that the imprecision of the "prime quality" definition leaves issuers of commercial paper unclear as to whether they must register that offering. However, the disadvantage to the issuer is outweighed by the advantages to the investing public. First, if their is doubt as to whether an offering is of "prime quality," the issuer should register the investment; thus, Congress' intent — promoting "full and fair disclosure of information to the public in the sales of securities," Pinter, 486 U.S. at 646, 108 S.Ct. at 2078 — is fulfilled. Moreover, as the Supreme Court noted in Reves, this method introduces flexibility into the Securities Act and thus accords the SEC and the courts sufficient oversight over the securities market. 494 U.S. at 63 n. 2, 110 S.Ct. at 950 n. 2.

d. Application of this standard to WBC commercial paper.

When this analysis is applied to WBC commercial paper, it is clear that the WBC commercial paper does not qualify for the § 3(a)(3) exemption. Given the short duration (one business day) of the commercial paper, the court first presumes that the § 3(a)(3) exemption applies. However, the commercial paper fails both criteria, thus disqualifying it for the exemption.

First, the WBC commercial paper is hardly prime quality. As of May 4, 1990, the WBC commercial paper's rating was very poor or nonexistent. Moreover, there were no backup lines of credit in place to pay off the obligations should the holding company fail. In addition, WBC had few if any liquid assets with which to pay off any obligations coming due. Finally, WBC failed only hours after NBW sold the commercial paper to AFSCME. These indications leave no question but that the paper meets no reasonable definition of prime quality.¹⁶ Second, the record indicates that NBW offered and sold WBC commercial paper to members of the general public, sophisticated or not, so long as they had $25,000 to invest. See Part II.A., above. Thus, the court concludes that, despite the presumption, the WBC commercial paper is not exempt from registration under § 3(a)(3).¹⁷

16 The FDIC's argument seems to suggest that any commercial paper may be termed "prime quality." FDIC Motion at 24. The court rejects this tautological interpretation.

17 It should be noted that counsel for Washington Bancorporation reached this same conclusion, albeit by a different method, at the time of the transactions. On March 22, 1990, Dow, Lohnes Albertson sent an opinion letter to the Federal Reserve Bank of Richmond on behalf of WBC concerning WBC commercial paper's exemption from registration. In that letter, WBC's counsel acknowledged that, even in light of Reves, duration was not the sole criterion for determining whether or not the § 3(a)(3) exemption applied: "[c]learly, the mere fact that a note will mature within nine months is not sufficient by itself to satisfy the requirements of the exemption." FDIC Appendix, ex. 6 at 5 (emphasis added). The letter further stated that "the federal courts generally concur that the paper must be of prime quality. . . ." Id. at 6. Finally, WBC's counsel stated that important to the determination of whether the exemption applies are ". . . the paper's speculative nature [and] the solvency of the issuer. . . ." id.

2. § 4(2).

The FDIC also argues that genuine issues of fact remain as to whether § 4(2), 15 U.S.C. § 77d(2)¹⁸, applies to WBC commercial paper. FDIC Motion at 33. Quoting from SEC v. Ralston Purina Co., 346 U.S. 119, 73 S.Ct. 981, 97 L.Ed. 1494 (1953), the FDIC asserts that this section applies when an individual has "access to the same kind of information that the 1933 Act would make available in the form of a registration statement." FDIC Motion at 33 (quoting Ralston Purina at 125-26, 73 S.Ct. at 985). The statutory standard is met, according to the FDIC (citing SEC v. Murphy, 626 F.2d 633, 647 (9th Cir. 1980)), "where, in light of all the circumstances, adequate information is available to the offerees." FDIC Motion at 34.

The FDIC then examines several factors to demonstrate that the exemption should apply. First, it claims that NBW had a very limited distribution for WBC commercial paper. However, NBW left behind copies of the Treasury Services brochure, discussed earlier, after sales calls to potential customers; these brochures advertised WBC commercial paper. The universe of offerees is thus large and impossible to recreate. Moreover, the WBC commercial paper had been offered to the public for approximately six years. Finally, the diversity among the group of commercial paper holders indicates that the group of offerees was equally diverse and varied. See FDIC Appendix, Ex. 35.

Second, the FDIC claims that the investors had access to sufficient information to inform them of the risks inherent in the investment. Yet, none of the reports cited by NBW provided the information that would have been on a registration statement.¹⁹ See FDIC Appendix, Exs. 19-27; AFSCME Reply at 36.

19 The information does not give an investor sufficient information to comprehend the risky nature of WBC commercial paper, but rather reports on personnel changes and the like. In fact, some of these reports were released only after NBW's collapse; these, of course, were of no guidance to the already hapless investors.

Finally, the FDIC claims that AFSCME was financially sophisticated and thus could fend for itself without a registration statement. Yet, FDIC provides no indication that all the offerees were sophisticated; nor could they given the indeterminate class of offerees.²⁰ Moreover, NBW even had to tell AFSCME's employee what commercial paper was when AFSCME first started investing; this hardly shows the high level of sophistication necessary for the exemption to apply.

20 As the FDIC admits, § 4(2) applies to a particular offering, not any particular offeree. See FDIC Motion at 41. Thus, all the offerees must be sophisticated or the exemption does not apply. The FDIC has not made any such demonstration nor indicated that it could do so.

The FDIC has not demonstrated that there is any question regarding the application of § 4(2): despite the FDIC's arguments, the court concludes that relevant information — the type of information that would have been included on a registration statement and would have assisted investors — was not sufficiently available to the offerees. Thus, § 4(2) does not apply.

3. Conclusion.

The FDIC has not demonstrated that there is a genuine issue of material fact as to either of these exemptions. Thus, the court concludes that the WBC commercial paper did have to be registered under § 5.

D. Loss Causation.

The individual defendants claim that summary judgment is precluded by the plaintiff's failure to prove loss causation, that is, that NBW's failure to register actually caused AFSCME's losses. However, loss causation is not an element of the prima facie case under § 12(1); thus, absence of proof on this element is irrelevant.

To prove their point, the individual defendants rely on several cases dealing with § 12(2) of the 1933 Act. Although terms in the two provisions are often accorded similar interpretations by the courts, see e.g., Pinter, 486 U.S. at 642, 108 S.Ct. at 2076, the two causes of action are not identical. In fact, contrary to § 12(2), § 12(1) imposes strict liability:

The registration requirements are the heart of the Act, and § 12(1) imposes strict liability for violating those requirements. Liability under § 12(1) is a particularly important enforcement tool, because in many instances a private suit is the only effective means of detecting and deterring a seller's wrongful failure to register securities before offering them for sale.

Pinter, 486 U.S. at 638. Even the FDIC, in their response to the SEC brief, acknowledges that § 12(1) gives the investor the "unconditional right to rescind, regardless of the cause of loss, adequacy of disclosure, or knowledge of the buyer." FDIC SEC Response at 5. See also FDIC Motion at 43 ("Section 12(1) imposes liability without fault on the part of the seller.").

In light of the strict liability nature of the cause of action, therefore, loss causation is not a necessary element of AFSCME's prima facie case.

III. DEFENSES.

The FDIC raises several defenses which, it claims, should prevent this court from granting summary judgment in favor of AFSCME. The court finds none of these defenses availing.

A. Statutory Defenses.

The FDIC's statutory argument has two prongs: first, that a bank, like NBW, may not solicit sales of securities from its customers under the Glass-Steagall Act, 12 U.S.C. § 24 (Seventh);²¹ and second, that NBW's alleged solicitation of securities precludes recovery under § 12(1). Under the second prong, the FDIC claims that AFSCME's cause of action is precluded for three reasons: first, that recovery is precluded by the D'Oench doctrine; second, that the FDIC cannot be held liable for NBW's ultra vires acts; and third, that AFSCME may not recover due to statutory and legal non-recourse provisions. None of these survives scrutiny.

21 The court holds in III.A.2., below, that a § 12(1) cause of action may go forward even if the Glass-Steagall Act has been violated. Therefore, the court need not — and does not — determine whether NBW's actions constituted a violation of § 16.

1. The D'Oench doctrine.

The FDIC asserts that the D'Oench doctrine prevents recovery by AFSCME in this case because NBW sent confirmation slips to AFSCME which stated that all sales were non-recourse. Because no other provisions are in the record of the bank, the FDIC asserts that AFSCME is bound by these statements.

This court has already dealt extensively with the effect of the D'Oench doctrine on this case. See Mem. Op., Mar. 10, 1992. D'Oench protects the FDIC from secret side agreements or any arrangement in which plaintiff takes part that would tend to deceive bank examiners; it applies when the gravamen of the FDIC's assertion is the failure to get an agreement in writing. See FDIC v. State Bank of Virden, 893 F.2d 139, 144 (7th Cir. 1990). However, as the court determined in its previous opinion, Mem. Op. at 42-46, when the act being sued upon has no connection to an agreement, but rather involves an independent basis for liability, D'Oench is not implicated. See Patterson v. FDIC, 918 F.2d 540, 543 (5th Cir. 1990) (holding that Homestead right under Texas state constitution exists independent of any agreement by parties); In re Howard, 65 B.R. 498 (Bankr.W.D.Tex. 1986) (same); but see Union Fed. Bank v. Minyard, 919 F.2d 335, 336 (5th Cir. 1990) (holding that appeal to usury laws did not bar bank's D'Oench defense).

Here AFSCME's § 12(1) claim is not based on an "agreement" of any kind; rather, NBW's liability results from the sale of unregistered securities. The illegality of the commercial paper is the fact that creates the liability, not any act or agreement between the parties. No facts or law have changed since the court issued its opinion in March,²² and the court is not persuaded that there is any reason for the court to modify its previous holding today.

22 The FDIC states that this court's March holding was based largely on the presumption in that opinion that NBW was a statutory seller of securities, a presumption not applicable on summary judgment. However, as the court today concludes that NBW was indeed a seller, this argument is moot.

2. Ultra vires actions.

Section 16 of Glass-Steagall provides, in relevant part:

The business of dealing in securities and stock by [a national banking] association shall be limited to purchasing and selling such securities and stock without recourse, solely upon the order, and for the account of, customers, and in no case for its own account, and the association shall not underwrite any issue of securities or stock . . .

12 U.S.C. § 24 (Seventh). The FDIC claims that this provision trumps AFSCME's § 12(1) cause of action. AFSCME, for its part, asserts that § 16 might preclude recovery on ultra vires contracts, but claims that § 16 does not bar recovery under statutory causes of action. However, neither party is able to cite the court to any cases which deal with the interrelation of § 16 and § 12(1),²³ and the court has also found none.

23 Both parties do address Deitrick v. Greaney, 309 U.S. 190, 60 S.Ct. 480, 84 L.Ed. 694 (1940); Awotin v. Atlas Exch. Nat'l Bank, 295 U.S. 209, 55 S.Ct. 674, 79 L.Ed. 1393 (1935); Texas Pee. Ry. v. Pottorff, 291 U.S. 245, 54 S.Ct. 416, 78 L.Ed. 777 (1934).

In examining the cases addressing these two statutory provisions and the policy interests behind them, the court determines that § 16 is not designed to prevent a wronged purchaser of securities from utilizing § 12(1). As mentioned above, § 12(1) is a powerful, strict liability cause of action designed to ensure that a purchaser may rescind a purchase or recover losses whatever the cause. See Pinter, 486 U.S. at 638, 108 S.Ct. at 2074. See also FDIC SEC Response at 5 (§ 12(1) provides "unconditional right to rescind, regardless of the cause of loss, adequacy of disclosure, or knowledge of the buyer."). There is nothing in the statutory language, the legislative history, or the later interpretation of § 16 which limits this view. Thus, the court holds that AFSCME's § 12 right of recovery is not precluded by NBW's alleged violation of § 16.

3. Non-recourse provisions.

Lastly, the FDIC argues that AFSCME may not recover because the sales agreement between NBW and AFSCME and § 16 of the Glass-Steagall Act provide that all sales of securities are non-recourse. However, the definition of "non-recourse" urged by the FDIC, encompassing as it does any possible liability — whether derived from contract, tort, or statute — of a bank to a purchaser of security, is significantly too broad. As the Court of Appeals for the Second Circuit has stated, § 16 prevents a bank form entering into contracts which obligate the bank to assume its brokerage customers' risks. Securities Industry Ass'n v. Board of Governors, 716 F.2d 92, 100 n. 4 (2d Cir. 1983); aff'd, 468 U.S. 207, 104 S.Ct. 3003, 82 L.Ed.2d 158 (1984). Authority in this circuit agrees. See Securities Industry Ass'n v. Board of Governors, 627 F. Supp. 695, 701 (D.D.C.), order rev'd on other grounds, 807 F.2d 1052 (D.C. Cir. 1986). No such contract was made in this case. Rather, NBW's liability is predicated on a federal statute and is therefore not precluded by § 16's non-recourse provision.

4. Conclusion.

Thus, none of the defenses raised by the FDIC either under the Glass-Steagall Act or the D'Oench doctrine protect the FDIC from § 12(1) liability.

B. Equity.

The final issue the court must address is whether equity should prevent AFSCME's recovery. The FDIC makes two arguments: first, that AFSCME was a sophisticated investor which should not reap a windfall for a risky investment; and second, that federal law precludes punitive damages against the FDIC in its receiver capacity. Neither argument is successful.

1. Case law.

In its first argument, the FDIC asserts that cases such as Pinter and D'Oench indicate that any modicum of fault on the part of the securities purchaser should preclude recovery under § 12(1). By not allowing AFSCME to recover, the FDIC argues, the court would be preventing a sophisticated investor from reaping a windfall at the hands of innocent investors and the federal insurance fund.

However, contrary to the FDIC's suggestions, Pinter advises that equitable limitation on § 12(1) recovery should occur in very limited contexts: only those in which the seller can demonstrate both significant fault on the part of the purchaser and that denial of recovery would not impede the purposes of the Securities Act. 486 U.S. at 633, 108 S.Ct. at 2071. In this case, however, NBW sold WBC commercial paper in a situation where a clear conflict of interest exists, particularly since both NBW and WBC were in dire economic straits (a fact of which NBW and WBC directors were well aware). AFSCME's alleged sophistication does not rise to such a level as to outweigh NBW's fault. Moreover, the purpose of the securities laws will be achieved only if § 12(1) liability is found whenever an entity sells unregistered, non-prime quality commercial paper to the public. Regardless of who the seller is, bank or individual, Congress' goals are achieved only if the law is enforced (even if, in this case, the FDIC must foot the bill).

2. Statutory law.

The FDIC's final argument is that federal statutory laws prevent the imposition of punitive damages against the FDIC in its receiver status. Although the FDIC contends that a § 12(1) remedy is purely punitive and serves no deterrent effect, it is clear that § 12(1) provides only for actual damages suffered by the security purchaser. This argument must therefore fail.

IV. CONCLUSION.

For the reasons set forth herein, AFSCME's motion for summary judgment on Count I will be GRANTED. AFSCME shall be entitled to entry of summary judgment against defendant for $1,800,000 plus interest and the costs of this action. The FDIC's counter-motion for summary judgment will be DENIED.

at 3-4; Mischel v. Serack Shoes, Inc., Civ. No. H90-92 (TEC), 1990 WL 484229 (D.Conn. June 5, 1990), slip op. at 15-16; Conlin v. Rocking Horse Ranch Corp., Civ. No. H89-473 (AHN), 1990 WL 484230 (D.Conn. Apr. 20, 1990), slip op. at 2-3; Spotlight Marketing Corp. v. BPI Communications, Inc., Civ. No. B89-404 (JAC) (D.Conn. Feb. 2, 1990), slip op. at 2; Altorfer v. Special Metals Corporation, Civ. No. B88-405(WWE) (D.Conn. March 8, 1989), slip op. at 5; Edelman v. J.B. Lippincott Co., Inc., Civ. No. B88-426 (TFGD) (D.Conn. Feb. 2, 1989), slip op. at 2, 1989 WL 225418; New England Systems, Inc. v. Service of North America, Inc., Civ. No. N87-359 (EBB) (D.Conn. Nov. 13, 1987), slip op. at 3-4; Teleco Oilfield Services, Inc. v. Skandia Ins. Co., 656 F. Supp. 753, 756 (D.Conn. 1987).

The plaintiff has the burden of establishing, by a preponderance of the evidence, that personal jurisdiction exists. Savin, supra, 898 F.2d at 306; Hoffritz for Cutlery, Inc. v. Amajac, Ltd., 763 F.2d 55, 57 (2d Cir. 1985); Marine Midland Bank, N.A. v. Miller, 664 F.2d 899, 904 (2d Cir. 1981); Morris, supra, slip op. at 4; Mischel, supra, slip op. at 16; Conlin, supra, slip op. at 3; Swanson v. Edgewood Golf Course of Southwick, Inc., Civ. No. H89-470(PCD) (D.Conn. Feb. 20, 1990), slip op. at 2, 1990 WL 484232; Atlantic Maritime Enterprises Corp. v. Hong Kong Borneo Services, Inc., Civ. No. B88-674 (EBB) (D.Conn. Feb. 2, 1990), slip op. at 3, 1990 WL 484929; David, supra, 677 F. Supp. at 98; Crestmont Federal Savings Loan Association v. Craumer, Civ. No. B89-503 (TFGD) (D.Conn. Nov. 16, 1989), slip op. at 3; Whelen Engineering Co., Inc. v. Tomar Electronics, Inc., 672 F. Supp. 659, 661 (D.Conn. 1987); Teleco, supra, 656 F. Supp. at 756. In ruling upon a motion to dismiss for lack of personal jurisdiction, the court may proceed upon written submissions or through an evidentiary hearing; where no evidentiary hearing is held, the plaintiff need only make a prima facie showing, through affidavits and supporting materials, that jurisdiction exists. Hoffritz, supra, 763 F.2d at 57; Morris, supra, slip op. at 4; Conlin, supra, slip op. at 4; Swanson, supra, slip op. at 2; Atlantic Maritime, supra, slip op. at 3-4; NESP Co., Ltd. of Enfield v. Benchmark Industries, Inc., Civ. No. H86-1380(MJB) (Feb. 5, 1988), slip op. at 3; David, supra, 677 F. Supp. at 98; New England Systems, supra, slip op. at 4; Whelen, supra, 672 F. Supp. at 662; Teleco, supra, 656 F. Supp. at 756. All ambiguities must be resolved in the plaintiff's favor. Hoffritz, supra, 763 F.2d at 57; Marine Midland, supra, 664 F.2d at 904; Morris, supra, slip op. at 4; Swanson, supra, slip op. at 2; Atlantic Maritime, supra, slip op. at 4; NESP, supra, slip op. at 3; David, supra, 677 F. Supp. at 98; Teleco, supra, 656 F. Supp. at 756. However, in order to make a prima facie showing of jurisdiction, a plaintiff may not rely only on conclusory statements. NESP, supra, slip op. at 4.

Coan makes no reference in his complaint to the Connecticut long-arm statute or statutes upon which he relies. His sole reference in his brief is to Conn.Gen.Stat. § 52-59b(a)(2), with no caselaw citations. Because Coan could easily amend his complaint to allege the proper statutory provisions, the court will therefore analyze the statutes which might apply here.

a. THE CORPORATE DEFENDANTS

The four corporate defendants are JMA, Equitable, Matrix, and GICC, all of which are Delaware corporations. None of them own any property in Connecticut, do business here, or regularly transact business here. (Mallin Aff't ¶ 4; Gangel Aff't 3).¹⁸ In his affidavit, Mallin avers as follows:

. . . For the purpose of the transaction which is the subject of this suit, the home of one of my former secretaries in East Haddam, Connecticut, was used to receive mail. At no time did JMA have an office in Connecticut from which any business was conducted.

The only time I have been in the State of Connecticut to conduct any business in connection with the transaction involved in this case was during July, 1986, when, as an officer of JMA, I was invited by Richard Bertoli and Stanley Scheinman to visit the HITK Corporation in Stamford, Connecticut to discuss possible tax shelter transactions. Except for that one time, neither I nor any employee or agent of JMA has conducted any business in that State in connection with this transaction.

18 This portion of the motion is really one under Rule 12(b)(2), for lack of personal jurisdiction, as opposed to a Rule 12(b)(6) motion for failure to state a claim. In considering Rule 12(b)(2) motions, a court may consider affidavits and documents submitted by the parties, see notes 2 4 supra, without converting such motions in ones for summary judgment under Rule 56. NESP, supra, slip op. at 4. See also Publications Group, Inc. v. American Society of Heating, Refrigerating Air Conditioning Engineers, Inc., 566 F. Supp. 316, 318 (D.Conn. 1983). Cf. Festa v. Local 3, Int'l Brotherhood of Electrical Workers, 905 F.2d 35, 38 (2d Cir. 1990), (no conversion necessary for Rule 12(b)(1) motions).

(Mallin Aff't ¶¶ 2-3).

There are three potential statutory bases for personal jurisdiction over the corporate defendants here — Conn.Gen.Stat. §§ 33-411(b), (c)(1) and (c)(4).

i. Conn.Gen.Stat. § 33-411(b)

Section 33-411(b) provides in full: "Every foreign corporation which transacts business in this state in violation of section 33-395 or 33-396 shall be subject to suit in this state upon any cause of action arising out of such business."¹⁹ The federal courts consistently have held that § 33-411(b) does not extend to the permissible constitutional limits. Atlantic Maritime, supra, slip op. at 4 n. 2; New England Systems, supra, slip op. at 13; Bross Utilities Service Corp. v. Aboubshait, 489 F. Supp. 1366, 1371 n. 30 (D.Conn.), aff'd mem., 646 F.2d 559 (2d Cir. 1980) ( multiple citations therein). The cases most factually similar to the instant one are Bross, supra, and Atlantic Maritime, supra. Bross involved a Connecticut resident who described himself as an agent of the three defendant Saudi Arabian corporations and who held two meetings at plaintiff's Connecticut headquarters; all other communications between plaintiff and these defendants were by telephone or through international telexes. 489 F. Supp. at 1370. Judge Cabranes held that there was no jurisdiction over these foreign corporations under § 33-411(b), as "[t]he transmission of communications between an out-of-state defendant and a plaintiff within the jurisdiction does not, by itself, constitute the transaction of business in the forum state." Id. at 1371-72. Similarly, the plaintiff in Atlantic Maritime engaged in negotiations with the defendant Hong Kong corporation by telephone and telex communications, culminating in an oral agreement which was confirmed in a telex. Slip op. at 2-3. Under these circumstances, Chief Judge Burns found that there was no jurisdiction under § 33-411(b). Slip op. at 7-8.

19 Sections 33-395 and 33-396 prohibit a foreign corporation from transacting business in this State unless empowered to do so by a general or special act of the state, or unless it has procured a certificate of authority from the Secretary of State, respectively.

It is absolutely clear that Equitable and Matrix did not transact business in Connecticut.²⁰ The only allegations in the complaint against GICC are that on March 2, 1987 and again on May 19, 1987, GICC sent reminder letters to HITK Financial for payments, which payments were made promptly thereafter. (¶¶ 59-60). JMA's only connection with this state was that Mallin's former secretary received mail for JMA at her East Haddam, Connecticut home,²¹ and at the invitation of Messrs. Bertoli and Scheinman, Mallin had a business meeting in July 1986 at HITK's Stamford office in his capacity "as an officer of JMA." (Mallin Aff't ¶¶ 2-3). It is additionally alleged that JMA sent a demand letter to HITK Financial on or about November 18, 1987. (Complaint ¶ 62). Such contacts are even more remote than those at issue in Bross, supra, and in Atlantic Maritime, supra, which were held to be insufficient. Thus, this court lacks in personam jurisdiction over the corporate defendants under Conn.Gen.Stat. § 33-411(b).

20 Exh. E contains copies of three checks drawn on Equitable's checking account, dated January 5, 1987, February 5, 1987, and July 16, 1987, on which the corporate address is in Cos Cob, Connecticut. These checks, by themselves, are insufficient to demonstrate that Equitable was transacting business in this state.

21 Coan submitted copies of various federal tax forms which list JMA's address in East Haddam (Exhs. D(a)-(b)) and copies of letters from JMA with this address (Exhs. D(c) (e)).

ii. Conn.Gen.Stat. § 33-411(c)(1)

Conn.Gen.Stat. § 33-411(c)(1) provides in pertinent part:

Every foreign corporation shall be subject to suit in this state, . . . whether or not such foreign corporation is transacting or has transacted business in this state and whether or not it is engaged exclusively in interstate or foreign commerce, on any cause of action arising as follows: (1) Out of any contract made in this state or to be performed in this state

. . .

Coan has not alleged that the late December 1986 closing, consummating this transaction, took place in Connecticut. It is clear that for purposes of § 33-411(c)(1), a contract is considered "made" when and where the last thing is done which is necessary to create an effective agreement. New England Systems, supra, slip op. at 6-7 (eight-hour negotiation session held in New Jersey, at conclusion of which letter-agreement was signed, did not result in contract being made in Connecticut); McFaddin v. National Executive Search, Inc., 354 F. Supp. 1166, 1170 n. 8 (D.Conn. 1973) (execution by defendant of contract in the District of Columbia precluded finding that contract was made in this state). See also Gerber Group, Ltd. v. Proto-Craft Model Mold Inc., Civ. No. B85-117(RCZ) (D.Conn. Sept. 21, 1987), slip op. at 5.

With respect to the second-prong of § 33-411(c)(1), i.e., contracts "to be performed in this state," the district judges have rejected any argument that such language is to "be given a limited construction to require performance in this state by the party over whom jurisdiction is sought." Clemco Corp., Inc. v. Frantz Mfg. Co., 609 F. Supp. 56, 57 (D.Conn. 1985); Bowman v. Grolsche Bierbrouwerij B. V., 474 F. Supp. 725, 731-32 (D.Conn. 1979). In fact, in Bowman, supra, Judge Daly held that where the contract "contemplated and required performance" in the state by plaintiff, defendant was subject to jurisdiction under § 33-411(c)(1).

Here, the only performance alleged in the complaint is HITK Financial's payment to BASLI of $157,034.67 in March 1987 and its payment to GICC of $161,193.01 in June 1987. (Complaint ¶¶ 58-60). As HITK Financial is a Connecticut corporation, the Court must infer that these payments were generated from Connecticut. In Teleco, supra, Judge Zampano held that a Connecticut-based corporation's payments of insurance premiums to the defendant Scandinavian insurance companies subjected such companies to jurisdiction in this state for a claim of breach of the insurance contract and for bad faith tortious acts. The court ruled: ". . . Teleco's payment of premiums from Connecticut constitutes actual and substantial performance of the terms of the contract with the Scandinavian Insurers in this state." 656 F. Supp. at 757. The facts giving rise to that lawsuit involve far more involved relations than those in the present suit. In Teleco, defendants had insured certain equipment used on offshore rigs; under the two policies in effect, plaintiff recovered $637,200 under the first policy and claimed an additional forty-eight losses, of $180,000 apiece, during a one-year period under the second policy. Id. at 755. In addition to its premium payments, plaintiff was required to submit quarterly reports, and the defendants exercised their right to inspect plaintiff's books in Connecticut. Id. at 755-56. This involvement between the parties is more intense than the single payment made by HITK Financial, presumably from Connecticut, to GICC in June 1987.

Moreover, even assuming arguendo that the requirements of § 33-411(c)(1) were met, application of that section to the facts here would exceed constitutional limits. As the Connecticut Supreme Court ruled in Lombard Bros., Inc. v. General Asset Management Co., 190 Conn. 245, 255, 460 A.2d 481 (1983), under § 33-411(c), ". . . it is the totality of the defendant's conduct and connection with this state that must be considered, on a case by case basis, to determine whether the defendant could reasonably have anticipated being haled into court." With respect to subsection (c)(1), that court held that ". . . even incidental acts of performance of contracts in this state would come within our statute if the defendant had other significant contacts with this state." Id. at 256-57, 460 A.2d 481. The defendant's contacts with Connecticut in Lombard Bros. were far more extensive than those presented here, where plaintiff had transferred funds from a Connecticut bank to a New York bank, defendant had mailed 145 confirmation statements from New York to here, defendant had placed two notices in the New York Times and the Wall Street Journal, and defendant had twelve other customers in Connecticut, with whom it had placed $771,000,000 in trades, representing 0.6 percent of its total business. Id. at 255-56. "Given the sparsity of contacts presented by the present record," the Connecticut Supreme Court thus concluded that plaintiff had not met its burden of proving that § 33-411(c)(1) conferred jurisdiction over the defendant. Id. at 257. See also Altorfer, supra, slip op. at 8-9.

iii. Conn.Gen.Stat. § 33-411(c)(4)

Conn.Gen.Stat. § 33-411(c)(4) provides:

Every foreign corporation shall be subject to suit in this state, . . . whether or not such foreign corporation is transacting or has transacted business in this state and whether or not it is engaged exclusively in interstate or foreign commerce, on any cause of action arising as follows: . . . (4) out of tortious conduct in this state, whether arising out of repeated activity or single acts, and whether arising out of misfeasance or nonfeasance.

Coan's Third and Fourth Counts are for fraud and negligent misrepresentation, respectively, both of which constitute "tortious conduct."

Connecticut district judges have ruled for nearly two decades that false representations entering Connecticut by wire or mail constitute tortious conduct in Connecticut under § 33-411(c)(4). Mischel, supra, slip op. at 16-18; Blumberg Associates, Inc. v. Spectrix Microsystems, Inc., Civ. No. H86-1560(TEC) (D.Conn. Feb. 22, 1988), slip op. at 9-10; David, supra, 677 F. Supp. at 97; Teleco, supra, 656 F. Supp. at 758; McFaddin, supra, 354 F. Supp. at 1171. As previously mentioned in Part II. B.2.a.i supra, there are absolutely no allegations in Coan's complaint that corporate defendants Equitable and Matrix had any communications with anyone in Connecticut. The sole communications had by defendant GICC were the two reminder letters sent to HITK Financial, on March 2, 1987 and May 19, 1987. (Complaint ¶¶ 59-60). There is no allegation, however, that any representations made in such reminder letters were fraudulent.²²

22 In his brief in opposition, Coan relies almost exclusively upon this Magistrate's prior Recommended Ruling on Defendants' Motions to Dismiss, filed January 24, 1988 and approved on March 1, 1988 (Dkt. # 94) ("Prior Ruling"), in the BASLI Action. In that decision, which concerned the fraudulent conveyance claims against defendant Schuck and former defendant V.C.S., Inc., the Court was forced to rely solely upon the allegations in BASLI's complaint, as neither side submitted any affidavits in support of their factual arguments. (Prior Ruling at 4). After discussing the "critical events" test applied in Bross, supra, 489 F. Supp. at 1374, the Prior Ruling found that as neither side presented any affidavits, "there is presently no evidence to dispute that the alleged injury [from the alleged fraudulent conveyances] has its apparent effect in Connecticut where the instant litigation is pending." (Prior Ruling at 6-7, 9). The procedural basis for this recommended ruling clearly differs from that presented in the Prior Ruling.

As to defendant JMA, Mallin, "as an officer of JMA" held a meeting in July 1986 at HITK's corporate headquarters in Stamford with Messrs. Bertoli and Scheinman. (Mallin Aff't ¶ 3). In addition, JMA sent a demand letter to HITK Financial on or about November 18, 1987. (Complaint ¶ 62).²³ The case factually closest to this one is David, supra, in which defendants' sole contacts with Connecticut were telephone conversations and correspondence by mail initiated from Florida, in which plaintiff alleged defendants made fraudulent misrepresentations regarding the purchase price of a Florida condominium, the availability of financing, the amount of the deposit, and refund of such deposit. 677 F. Supp. at 95-96. Judge Cabranes held that such allegations presented "a prima facie case of tortious conduct in Connecticut sufficient to establish personal jurisdiction under Connecticut's long-arm statute, § 33-411(c)(4) . . ." Id. at 98 (emphasis in original). He further ruled that due process was not offended, in that the defendants "purposefully availed themselves of the benefits of this state" by their allegedly fraudulent misrepresentations. Id. at 99-100. The David decision does not quantify the number of telephone conversations and letters initiated by defendants to plaintiff. If communications from afar which enter Connecticut are sufficient to invoke jurisdiction under § 33-411(c)(4), then surely the July 1986 meeting in Stamford, at which JMA was represented by Mallin, similarly is sufficient to satisfy the statutory language and constitutional requirements presented by that long-arm statute.

23 See also Exh. D(e) (letter, dated January 12, 1988, from JMA to HITK).

b. THE INDIVIDUAL DEFENDANTS

The four individual defendants who claim lack of in personam jurisdiction are Smith, Hasen, Mallin, and Gangel, none of whom are Connecticut residents.²⁴ There are two potential statutory bases for personal jurisdiction over them — Conn.Gen.Stat. §§ 52-59b(a)(1) and (2).

24 In his brief, filed January 8, 1990 (Dkt. # 35), Scheinman specifically stated that he "makes no claim that this Court lacks jurisdiction over his person." (At 2).

i. Conn.Gen.Stat. § 52-59b(a)(1)

Conn.Gen.Stat. § 52-59b(a)(1) provides in relevant part: ". . . a court may exercise personal jurisdiction over any nonresident individual . . . who in person or through an agent . . . transacts any business within the state . . ." In Zartolas v. Nisenfeld, 184 Conn. 471, 474, 440 A.2d 179 (1981), the Connecticut Supreme Court observed that the term "transacts any business" is not defined within the statute; the court accordingly construed that term "to embrace a single purposeful business transaction." The court then elaborated:

In determining whether the plaintiffs' cause of action arose from the defendant's transaction of business within this state we do not resort to a rigid formula. Rather, we balance considerations of public policy, common sense, and the chronology and geography of the relevant factors.

Id. at 477, 440 A.2d 179. The court further noted that the phrase "transacts any business" in § 52-59b(a) "has a broader meaning" than the phrase "transacts business" within the various corporate statutes. Id. at 476 n. 4, 440 A.2d 179. See also Crestmont, supra, slip op. at 6; Corporate Park Associates v. Goldstein, Civ. No. H89-173(PCD) (D.Conn. Sept. 7, 1989), slip op. at 3-4; Joiner v. Greene, Civ. No. N88-208(EBB), slip op. at 3-4.

In applying this standard, courts have reached varying results. For example, in Zartolas, the Connecticut Supreme Court held that the defendants' execution, in Iowa, of a warranty deed for Connecticut realty satisfied the statute, as "execution of a warranty deed pursuant to a sale of real property is a legal act of a most serious nature." 184 Conn. at 475, 440 A.2d 179. Similarly, Judge Dorsey held that the defendant's execution, in New York, of a guaranty of a lease, fell within this long-arm statute, where the office space being leased was in Connecticut, both the lessor and lessee were Connecticut entities, and all notices with respect to the lease were to be given in Connecticut. Corporate Park, supra, slip op. at 3-4. The same conclusion was reached in Joiner, supra, where the defendant delivered the automobile at issue to plaintiff in Connecticut and accepted partial payment here. Slip op. at 3-4.

Less substantial involvement has led judges to conclude that the statutory requirements of § 52-59b(a)(1) were not met. See, e.g., Savin, supra, 898 F.2d at 306-07 (Kentucky defendant's execution of promissory note as part of New York syndication with payments to Connecticut plaintiff insufficient to confer jurisdiction in this state); Crestmont, supra, slip op. at 7-8 (foreign defendants' guarantee of limited partnership's obligation to New Jersey plaintiff not within statute, where even though realty was located in this state, payments were to be made in New Jersey); Greene v. Sha-Na-Na, 637 F. Supp. 591, 595-96 (D.Conn. 1986) (no § 52-59b(a)(1) jurisdiction over partnership for advertisement in New York Post for New York performance or for broadcast into Connecticut of national telethon originating in California); Rosenblit v. Danaher, 206 Conn. 125, 140-42, 537 A.2d 145 (1988) (no long-arm jurisdiction present over Massachusetts attorneys in legal malpractice suit filed by Connecticut client, where only one meeting was held in Connecticut and litigation at issue had been filed in Massachusetts).

It is clear that Hasen, a New York attorney, did not transact any business in Connecticut within the meaning of § 52-59b(a)(1). The sole jurisdictional allegation against Hasen is that he sent a draft tax opinion to HITK Financial in March 1987. (Complaint ¶ 53-54). However, as set forth in Rosenblit, supra, that is not enough. The same holds true with respect to Gangel, Smith, and Mallin. Even if the corporations with which Smith and Mallin were affiliated fall within Connecticut's reach, such affiliation does not, in and of itself, impose long-arm jurisdiction here. As Judge Cabranes stated in Bross, supra, "Nothing in the record indicates that the individual defendants transacted any business other than through the corporations which they controlled." 489 F. Supp. at 1373. As in Morris, supra, slip op. at 7-8, the defendants here have been named "in their various corporate and individual capacity . . ." (Complaint ¶ 17). However, the defendants in Morris had more contact with Connecticut than did the defendants here, as they actively negotiated the contract with plaintiff on behalf of the defendant Oklahoma church, travelled to Connecticut to meet with plaintiff, solicited funds for the church in Connecticut, and personally signed solicitation letters into this state. Id. Even the activities of Mallin, who did hold one meeting in Connecticut and sent one communication here (Mallin Aff't ¶ 3; Complaint ¶ 34), fall short of those found to establish long-arm jurisdiction in Morris, supra.

ii. Conn.Gen.Stat. § 52-59b(a)(2)

Conn.Gen.Stat. § 52-59b(a)(2) provides: ". . . a court may exercise personal jurisdiction over any nonresident individual . . . who in person or through an agent . . . commits a tortious act within the state . . ."²⁵ In Joiner, supra, Chief Judge Burns held that the defendant's telephone solicitations to plaintiff and a personal visit within this state satisfied the jurisdictional requirements of § 52-59b(a)(2). Slip op. at 4. In contrast, in Raymark Industries, Inc. v. Stemple, Civ. No. B87-635(WWE) (D.Conn. Oct. 7, 1988), Judge Eginton ruled that the defendant Chicago law firm did not fall within the ambit of this section by having submitted allegedly false claims on behalf of workers injured by exposure to asbestos, which claims were settled in a Kansas district court. Slip op. at 2-3. See also Greene, supra, 637 F. Supp. at 596-97. In David, supra, Judge Cabranes found that § 52-59b(a)(2) was satisfied by defendants' telephone and mail transmissions from Florida to Connecticut, as such fraudulent misrepresentations into this state are deemed to have occurred within this state. 677 F. Supp. at 97-98.

Plaintiff has not alleged that any communications sent by defendant Gangel or Smith into this state were fraudulent. He does, however, allege that in December 1986 defendant Mallin forwarded a computer sheet to Scheinman, presumably in Connecticut, which included prices for computer equipment, which prices exceeded prices listed in a computer guide. (Complaint ¶ 34). However, as Judge Cabranes stated in Bross, supra, "Nothing in the record indicates that the individual defendants transacted any business other than through the corporations which they controlled." 489 F. Supp. at 1373.²⁶ Again, the only allegation which goes to jurisdictional issues against Hasen is his having mailed a draft tax opinion to HITK Financial in March 1987. Even assuming arguendo that this sole written communication satisfies § 52-59b(a)(2), extension of long-arm jurisdiction over him under these circumstances would offend due process considerations. The quantitative and qualitative interaction between Hasen, on the one hand, and HITK and/or HITK Financial, on the other hand, pales in comparison with the interstate communications into Connecticut found to be constitutional in Joiner, supra, slip op. at 4, and in David, supra, 677 F. Supp. at 99-100.

26 The Morris decision did not address § 52-59b(a)(2).

c. SUMMARY

Accordingly, for the reasons stated in Parts II.B.2.a. b. supra, the Court finds that there is personal jurisdiction over defendant JMA pursuant to Conn.Gen.Stat. § 33-411(c)(4) but such jurisdiction is found lacking with respect to Equitable, Matrix, GICC, Smith, Hasen, Mallin, and Gengel.

3. Rule 9(b)

The JMA Parties, Scheinman, Smith, Hasen, and Auslander further argue that Coan's complaint fails to plead fraud with the particularity required by F.R.Civ. 9(b). Insofar as only four defendants presently remain in this litigation — BASLI, JMA, Scheinman, and Auslander — the Court need only review the Third and Fourth Counts with respect to these parties. The Second Circuit recently summarized the requirements of Rule 9(b) as follows:

To satisfy the particularity requirement of Rule 9(b), a complaint must adequately specify the statements it claims were false or misleading, give particulars as to the respect in which plaintiff contends the statements were fraudulent, state when and where made, and identify those responsible for the statements.

Cosmas v. Hassett, 886 F.2d 8, 11 (2d Cir. 1989) (citation omitted). See also Quaknine v. MacFarlane, Dkt. No. 89-7668 (2d Cir. Feb. 26, 1990), slip op. at 1961; Rocco v. Painewebber, Inc., 739 F. Supp. 83, 84-86 (D.Conn. 1990); Stanley Works v. Waxman Industries, Inc., Civ. No. H89-594(PCD), 1990 WL 484228 (D.Conn. Mar. 19, 1990), slip op. at 7-10; In re Prudential Bache/Condron Securities Litigation, Master Case File Civil No. B88-100(JAC) (D.Conn. Feb. 9, 1990), slip op. at 5-6; Runes v. Gridcomm, Inc., Civ. No. B86-473(TFGD) (D.Conn. Jan. 3, 1990), slip op. at 3-6, 1990 WL 483735. As Judge Dorsey recently observed, where "the transactions are numerous and take place over an extended period of time, less specificity is required." Schnabel Associates, Inc. v. Connecticut Housing Authority, Civ. No. H88-541(PCD) (D.Conn. Nov. 15, 1989), slip op. at 3 (citation omitted).

This precise issue previously was discussed in the BASLI Action, in this Magistrate's Recommended Ruling on Plaintiff's Motion to Dismiss Counterclaim, filed March 6, 1989 and approved by Judge Nevas on April 17, 1989 (Dkt. # 110) ("March 1989 Ruling"), slip op. at 6-10. That ruling held insufficient HITK's claims as to misrepresentation of the computer equipment at issue in the transaction, while upholding allegations with respect to a failure to disclose material information. (Slip op. at 9-10). Following such ruling, HITK filed its second amended counterclaim, which BASLI also sought to have dismissed. The Magistrate's Recommended Ruling on Plaintiff's Motion to Dismiss Second Amended Counterclaim, filed September 11, 1989 and approved by Judge Nevas on October 4, 1989 (Dkt. # 151) ("September 1989 Ruling"), found that HITK had corrected the insufficiency with respect to affirmative misrepresentations, as a "chain of misrepresentation" had been alleged. (Slip op. at 3-4).

The March 1989 Ruling cautioned, however, that problems could develop when additional defendants were named in HITK's counterclaims. (Slip op. at 26 n. 7). The Second Circuit ruled in DiVittorio v. Equidyne Extractive Industries, Inc., 822 F.2d 1242, 1247 (2d Cir. 1987): "Where multiple defendants are asked to respond to allegations of fraud, the complaint should inform each defendant of the nature of his alleged participation in the fraud." The court continued that "derelictions [which] are pleaded against the defendants generally, with little or no specifications as to individual roles" generally are insufficient under Rule 9(b). Id. Earlier this year, the Second Circuit dismissed under Rule 9(b) a fraud claim against a corporation where the sole allegation against it was its affiliations with two other defendants; the Court held that this allegation was "insufficient to link" such defendant to the alleged misrepresentation. Quaknine, supra, slip op. at 1962-63.

Coan's complaint alleges misrepresentation with respect to the value of the computer equipment which was the subject of the sale/leaseback arrangement (¶ 34), as well as failure to disclose other material information (¶¶ 36-39, 64). The March 1989 Ruling and the September 1989 Ruling held that the counterparts to these paragraphs in the BASLI Action were pled with sufficient particularity with respect to BASLI. While these paragraphs may have been too general with regard to the ten defendants other than BASLI (particularly the large group comprising the JMA Parties), the complaint does specify the roles played by the sole remaining defendants, namely BASLI, JMA, Scheinman, and Auslander.

C. MISCELLANEOUS ARGUMENTS 1. Authority/Ratification/Damages

As best as this Court can ascertain, Auslander additionally argues that Coan's complaint ought to be dismissed for failure to state a claim, as it fails to allege that Auslander lacked authority, that any alleged failure to disclose did not apply to him, that his actions were ratified by HITK Financial, and that the complaint fails to allege damages.²⁷

27 Outside of two citations with respect to the standards to be applied to motions to dismiss, Auslander's brief cites only one other case, which is one citation more than is found in Coan's discussion of these issues.

Outside of ¶ 14, which identifies him, the only other allegations against Auslander are as follows: that he received certain materials from Mallin and Hasen (¶¶ 34 53); that he received specific instructions from BASLI, Smith, Scheinman, and Hasen (¶¶ 36, 38); that he requested a tax opinion from Hasen (¶¶ 48, 52); that he provided documents to HITK's subsequent counsel (¶ 50); and that he failed to disclose, or did not provide, material information to the Boards of Directors of HITK and of HITK Financial (¶¶ 36, 47, 57).

It has long been the law in Connecticut that corporate officers may be "themselves liable [to third parties] for tortious conduct if they knowingly or carelessly assume to bind the corporation without authority, or misrepresent or conceal the true state of their authority, and thus falsely lead others to repose in it." Jacobs v. Williams, 85 Conn. 215, 220-21, 82 A. 202 (1912) (citations omitted). Such a claim is made in ¶ 36 of Coan's complaint. Thus, it is not grounds for dismissal that Auslander was acting as a "good soldier" merely in following the instructions of Scheinman and Hasen, with no independent duty to disclose.

Auslander cites Cohen v. Holloways', Inc., 158 Conn. 395, 260 A.2d 573 (1969) for the proposition that since HITK Financial had full knowledge of the transaction, it is estopped from denying it. The Connecticut Supreme Court described the doctrine of implicit ratification as follows:

. . . as a general rule, if the corporation through the officer . . . having authority to act, acquires or is charged with knowledge of the unauthorized act, the act not being prohibited by charter or by statute nor contrary to public policy, and does not repudiate it within a reasonable time, but without objection acquiesces therein, it is bound by the unauthorized act. . ..

. . . [A]s a general rule, if a corporation, with knowledge of the facts, accepts or retains the benefits of an unauthorized contract or other transaction by its officers or agents, as where it receives and uses or retains money or property paid or delivered by the other party, or accepts the benefit of services, etc., it thereby ratifies the contract or other transaction, or will be estopped to deny ratification. In other words, the law does not permit a corporation to receive and retain the benefits of a contract or transaction and at the same time repudiate liability thereunder or attempt to escape the burdens thereof on the ground that the contract or transaction was not authorized, or that authority therefor was not set forth in its records. . . .

Id. at 408-09 (citations omitted). The whole gist of this lawsuit is Coan's claim that the Boards of Directors of both HITK and HITK Financial lacked knowledge of this transaction. The Second Circuit has observed that in ruling on a motion to dismiss for failure to state a claim, the court "is not to weigh the evidence that might be presented at a trial but merely to determine whether the complaint itself is legally sufficient." Goldman v. Belden, 754 F.2d 1059, 1067 (2d Cir. 1985). Auslander's argument on the issue of ratification does not go to the sufficiency of Coan's pleadings. It is an issue more appropriately resolved by either a motion for summary judgment or at trial.

Auslander further argues, in one paragraph and without citation, that Coan has failed to allege how his alleged failures to disclose have caused damages. At this pleadings stage, it is only necessary for Coan to allege that HITK Financial was damaged. ( See, e.g., Complaint ¶¶ 74-75, 84, 90). Cf. McDonald v. Johnson Johnson, 537 F. Supp. 1282, 1362 (D.Minn. 1982), aff'd in part vacated in part, 722 F.2d 1370 (8th Cir.), modified, 722 F.2d 1390 (8th Cir.), cert. denied, 469 U.S. 870, 105 S.Ct. 219, 83 L.Ed.2d 149 (1984) ("It is not necessary that a plaintiff describe his damages with a great degree of certainty. Certainty plays a much more important role [at trial] in the measure of proof necessary to establish the plaintiff had in fact sustained some damage.").²⁸

28 Auslander also requests a bond pursuant to Conn.Gen.Stat. § 33-320(c). As § 33-320 was repealed in 1969, the Court presumes that Auslander is seeking indemnification pursuant to § 33-320a(c). Such motion is denied without prejudice as premature, as Auslander has not been "finally adjudged not to have breached his duty to the corporation." To the extent Auslander seeks an application for indemnification under § 33-320a(e), such application is held in abeyance, until there has been more discovery taken in this action.

Thus, there is no merit to any of these residual claims made by Auslander.

2. Rule 4(j)

Defendant Smith additionally argues that service was not made upon him within the 120-day limit set in F.R.Civ.P. 4(b). See note 5 supra. In light of the conclusions reached in Parts II.A. and B.1.b. supra, the Court need not address this issue here.

D. MOTIONS FOR MORE PARTICULAR STATEMENT

Motions for more particular statement, pursuant to F.R.Civ.P. 12(e), were filed by both Smith and Scheinman. Notwithstanding the extension granted to Coan, see note 6 supra, for the same reasons as stated in Part II.C.2. supra, Smith's motion is denied without prejudice as moot.

In his brief in opposition to Scheinman's motion (Dkt. # 45), Coan incorporates by reference HITK's motion for extension of time filed in the BASLI Action, which is docket entry number 202. As such motion was granted absent objection, Coan's request similarly is granted.

III. CONCLUSION

The motions to dismiss filed by the JMA Parties, Scheinman, Auslander, Smith, and Hasen are granted in part and denied in part as follows: For the reasons stated in Part II.A. supra, the motions of the JMA Parties, Scheinman, Auslander and Smith are granted with respect to the First and Second Counts, as no "security" is involved. With respect to the Third and Fourth Counts, for the reasons stated in Part II.B.2. supra, the motions to dismiss for lack of in personam jurisdiction are granted with respect to defendants Equitable, Matrix, GICC, Smith, Hasen, Mallin and Gangel, but denied with respect to defendant JMA. As to the remaining defendants on these two counts, for the reasons stated in Parts II.B.3. and C. supra, the motions to dismiss of defendants Scheinman and Auslander are denied. For the reasons stated in Part II.C.1. supra, Auslander's motion for a bond is denied without prejudice to renewal at a later time.

Lastly, the Rule 12(e) motion of defendant Smith is denied without prejudice as moot, and plaintiff Coan may respond to defendant Scheinman's similar motion within twenty-one days of receipt of this recommended ruling.

See 28 U.S.C. § 636(b) (written objections to ruling must be filed within ten days after service of same); F.R.Civ.P. 6(a), 6(e) 72; Rule 2 of the Local Rules for United States Magistrates, United States District Court for the District of Connecticut; Small v. Secretary, H HS, 892 F.2d 15, 16 (2d Cir. 1989) (failure to file timely objection to Magistrate's recommended ruling may preclude further appeal to Second Circuit).

Dated at New Haven, Connecticut, this 26th day of June, 1990.